September 23, 2019

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CFPB and NYAG File Response and Reply Briefs in RD Legal

The CFPB and the New York Attorney General have filed their response and reply briefs in the Second Circuit, where the CFPB and NYAG filed appeals from the district court’s decision and RD Legal Funding filed a cross-appeal.  The CFPB and the NYAG filed their opening briefs in March and RD Legal filed its opening brief in June.

RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the NFL Concussion Litigation Settlement Agreement (the “NFLSA”) and the September 11th Victim Compensation Fund of 2001 (the “VCF”).  The CFPB and NYAG sued RD Legal Funding in federal district court, asserting claims under the CFPA and state law.  The CFPB appealed from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  The NYAG appealed from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

Despite dismissing the NYAG’s federal and state claims, Judge Preska determined in her June 21 decision that the purchase agreements effected assignments of the benefits that, as to the NFLSA benefits, were void under the terms of the underlying settlement agreement and, as to the VCF benefits, were void under the federal Anti-Assignment Act (AAA).  After determining that the assignments were void, Judge Preska concluded that, as a result, the transactions were necessarily disguised usurious loans. (For the reasons discussed in our prior blog post, we believe the court’s conclusion is flawed.)  RD Legal Funding filed a cross-appeal from the district court’s conclusion that the transactions were disguised loans and stated UDAAP claims under the CFPA and claims for usury and misleading conduct under New York law.

Both the CFPB and NYAG restate their arguments that the CFPB’s structure is constitutional under controlling U.S. Supreme Court precedent and that if the Second Circuit determines that the Dodd-Frank’s for-cause removal provision that limits the President’s authority to remove the CFPB Director is unconstitutional, it should sever the provision rather than strike all of Title X as Judge Preska did.

CFPB Response and Reply Brief.  In its brief, the CFPB makes the following additional arguments:

  • RD Legal’s cross-appeal is improper because it is not aggrieved by the judgment dismissing the CFPA claims and, if the Second Circuit reverses the judgment, it will become aggrieved but only by the district court’s refusal to dismiss the complaint based on the merits of the CFPA claims.

  • The Second Circuit could address RD Legal’s merits arguments as an alternative ground for dismissal and, should it do so, find that the complaint states valid claims for CFPA violations because (1) RD Legal is a “covered person” because the purchase agreements, without the invalid assignments of benefits, grant consumers the right to defer payment of a debt, and (2) the complaint states claims for violations of the CFPA’s UDAAP prohibitions.

NYAG Response and Reply Brief.  In its brief, the NYAG makes the additional arguments above advanced by the CFPB and the following principal arguments:

  • The Second Circuit should reverse the district court’s dismissal of the NYAG’s state law claims for lack of subject matter jurisdiction because such claims involve an embedded federal issue, namely whether the AAA voids only the assignment of a substantive claim against the United States, or whether it also voids the assignment of the proceeds of such a claim in a private contract.  This is a substantial “federal question” because the Second Circuit’s interpretation of the AAA “could also have ramifications for how courts construe other federal statutes barring the assignment of federal payments.”

  • Because the complaint states a claim for deceptive practices under the CFPA, it also states a claim for misleading acts or practices under New York law.

  • Because the purchase agreements were actually loans or forbearances, the complaint states a claim for a violation of New York usury law.

At the end of June, Seila Law filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling that the CFPB’s single-director-removable-only-for-cause structure is constitutional.  The DOJ has not yet filed its reply brief (which is now due by September 18) but is expected to agree with Seila Law that the CFPB’s structure is unconstitutional.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied), DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank Act’s for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  On March 12, the Fifth Circuit heard oral argument in All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.

Copyright © by Ballard Spahr LLP

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Kaplinksy, partner, New York, finance
Partner

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

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